The Federal Reserve shocked the markets by failing to taper US stimulus (Photo: Reuters)
The Federal Reserve shocked the markets by failing to taper US stimulus (Photo: Reuters)

Markets are not finding it easy to digest the Federal Open Market Committee's failure 'to light the taper'.

The apologists are already saying that Chairman Ben Bernanke never really promised anything for September and that the sharp rise in US Treasury yields since May represents more than enough tightening.

The trouble is that those of us whose credo is 'never bet against the Fed' had concluded that 'Forward Guidance' means plenty of advance notice would be given and that Bernanke had duly signposted that tapering would start in September and finish next July. It was (and still is) screamingly obvious that the asset purchase programme cannot continue for long.

Big Ben's self-imposed purdah over the last two months had more or less clinched it.

What's Next?

Now, we appear to be back to interpreting kites flown by FOMC members and to dependency on monthly data that is notoriously prone to drastic revision.

Even then it is far from clear what data will be good enough to slow the 'printing presses'. James Bullard, the arch-dove from the St Louis Fed has already put the cat among the pigeons in saying last week's decision was a 'close call'.

No fewer than six of his FOMC colleagues are making speeches this week and perhaps some of them will be kind enough to spread more light as the excitement (punting) builds towards the next meeting on October 29th-30th.

In particular it would be very useful to know just how much of a worry for the FOMC is each of:

    • a federal government shutdown
    • the downward trend in the employment participation rate
    • an alleged pause in the housing market because of recent increases in mortgage rates
    • who is going to be the next FOMC Chairman

Market Movements

Until there is more clarity on these matters, most markets are going to remain unsettled, including those that are usually thought to benefit from QE's continuation.

Emerging markets are in danger of becoming lotteries while US equities now need reassurance from a spate of strong Q3 earnings. US Treasury yields are unlikely to fall back much more than they did last week and the same is true for the dollar.

Gold and commodities have probably had the best of their post FOMC 'fling' but growing discord in Libya may prop up prices for light crude oil.

US Data Speculation

This week's speculation over US data starts on Tuesday with house prices and consumer confidence, reaching a climax on Thursday with weekly jobless claims and the third cut of Q2 GDP but actually continues into Friday with (for dataholics) August's Personal Incomes and Spending and PCE Price Index (the FOMC preferred measure of inflation).

With less than two weeks to the next set of Non-Farm Payrolls, the jokes about more opinions than economists (whether or not placed end to end towards the moon) will become highly appropriate!

Alastair Winter is the Chief Economist at Daniel Stewart & Co